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My goal is to give you a basic understanding of what stock options are all about without hopelessly confusing you with unnecessary details. I have read dozens of books on stock options, and even my eyes start glazing over shortly into most of them.
Auto-Trade is a service offered by several on-line brokers. Auto-Trade makes it possible for an investor to carry out an options strategy in his own account without becoming an options guru or making all the trades on his or her own.
Never buy a mutual fund unless it is a no-load index fund with the lowest cost structure. (I will tell you where to find it later.)
Most smart people have set up a Roth IRA, 401(k), or other qualified retirement program. For some of them, it may be the only stock market investment they own.
In spite of the odds against winning, many people seem to like to invest in individual stocks – sort of like picking horses at the race track.
The 10K Strategy is my favorite investment strategy. I have used it to make an average of over 50% a year for three out of four consecutive years. I have now added a twist to the strategy so that annual returns might be less than those years but there should be a much higher likelihood of its succeeding.
Exchange-Traded Funds, or ETFs, are index funds that trade just like stocks on major stock exchanges. All the major stock indexes have ETFs based on them, including: Dow Jones Industrial Average (DIA), Standard & Poor's 500 Index (SPX), and Nasdaq 100 Composite (QQQQ).
Learn about some of my favorite stock option resources.
Terry’s Tips carries out an options strategy designed to significantly outperform the market and other conventional investments.
The strategy does not require picking the right stocks or timing the market. It primarily trades options on the S&P 500 (SPY) and can be used in an IRA.
Abbott
Laboratories (ABT) reported earnings before the bell on Thursday that beat top-
and bottom line estimates. Moreover, the medical device, diagnostics and
nutrition company beat expectations across all major business segments. While
impressive year-over-year comparisons were helped by depressed activity a year
ago, sales grew by 11% compared to 2019. Analysts were notably impressed, and
many upgraded their price targets to as high as $136 (the stock closed at $121
on Friday).
The stock dropped on Thursday as much as 2.6% but recovered to close above its 20-day moving average (blue line in chart). This trendline has provided unwavering support since the stock climbed above it in late June. This is part of a larger rally that has covered 15% since the beginning of June. Friday’s 2% jump pulled the stock above the 120 level (red line in chart), which has served as a top since early May. The next sight of potential resistance is 125, the site of April’s high. After that is ABT’s all-time high of 128.54 reached in mid-February.
If
you agree that ABT will stay above its 20-day moving average, consider the
following trade that relies on the stock remaining above 118 (green line in
chart) through expiration in five weeks.
Buy
to Open ABT 27Aug 115 put (ABT210827P115)
Sell to Open ABT 27Aug
118 put (ABT210827P118) for a credit of $0.90 (selling a vertical)
This
credit is $0.03 less than the mid-point
of the option spread when ABT was trading at $121. Unless the stock rallies
quickly from here, you should be able to get close to this amount.
Your
commission on this trade will be only $1.30 per spread. Each spread would then yield $88.70. This
trade reduces your buying power by $300 and makes your net investment $211.30
($300 – $88.70). If ABT closes above
$118 on August 27, both options will expire worthless
and your return on the spread would be 42% ($88.70 / $211.30).
Cintas
(CTAS) may not be in an exciting business – the company provides uniforms,
cleaning and restroom supplies, first aid supplies and fire extinguishers – but
its recent earnings report was anything but boring. The company easily beat
profit forecasts and slightly beat sales projections. Even the low end of the
company’s projected EPS range for fiscal 2022 is well above the analyst
estimate. The only smudge on the report was the projected sales estimate, which
came in below forecasts. Nevertheless, the report was greeted with a slew of
target price increases that ranged as high as $450 (the stock closed on Friday
at $386).
The
initial reaction to the earnings was a 2.6% drop on Thursday. But the stock
popped 4.6% on Friday, resuming its recent breakout above a trading range that
has dominated in 2021. More importantly, the shares found strong support at the
365 level (red line in chart), which has defined the top of the trading range
going back to November. CTAS trades only monthly options in 10-point
increments, so we’re using the 380 short strike (green line) for a put credit
spread. This is just above the stock’s 20-day moving average (blue line).
If
you agree that CTAS will stay above its 20-day moving average, consider the
following trade that relies on the stock remaining above 380 through expiration
in five weeks.
Buy to Open CTAS 20Aug 370 put (CTAS210820P370)
Sell
to Open CTAS 20Aug 380 put (CTAS210820P380) for a credit of $3.15 (selling a
vertical)
This
credit is $0.05 less than the mid-point
of the option spread when CTAS was trading at $386. Unless the stock rallies
quickly from here, you should be able to get close to this amount.
Your
commission on this trade will be only $1.30 per spread. Each spread would then yield $313.70. This
trade reduces your buying power by $1,000 and makes your net investment $686.30
($1,000 – $313.70). If CTAS closes above
$380 on August 20, both options will expire worthless
and your return on the spread would be 46% ($313.70 / $686.30).
Flash memory and semiconductor producer Micron Technology (MU) reported Q3 earnings last week that easily topped Street estimates. Earnings hit $1.88 per share, more than double from a year earlier and 10% greater than the consensus analyst estimate. Revenues jumped 36% from the year before and beat the estimate by $160 million. Moreover, MU expects further gains in Q4 that are well above analysts’ projections. The reaction from the Street was modestly positive, though there were some concerns over MU’s cost structure.
The
stock’s post-earnings price move was anything but positive. The shares fell
5.7% the day after the report and continued lower, bottoming at a 10.6% decline
in Thursday’s trading. That low brought the stock to its 200-day moving
average, which hasn’t been tested since last October. Friday was an encouraging
day for MU, as the stock bounced 2% higher to log its best day since earnings.
The 200-day sits at the 75 level, which is where we are placing the short put
of our bullish credit spread as we look for trendline support to hold. Note
also that the 75-76 area has provided strong support several times throughout
2021.
If
you agree that MU will stay above its 200-day moving average, consider the
following trade that relies on the stock remaining above 75 through expiration
in six weeks.
Buy
to Open MU 20Aug 72.5 put (MU210820P72.5)
Sell to Open MU 20Aug
75 put (MU210820P75) for a credit of $0.60 (selling a vertical)
This
credit is $0.04 less than the mid-point
of the option spread when MU was trading at $78.74. Unless the stock rallies
quickly from here, you should be able to get close to this amount.
Your
commission on this trade will be only $1.30 per spread. Each spread would then yield $58.70. This
trade reduces your buying power by $250 and makes your net investment $191.30
($250 – $58.70). If MU closes above $75
on August 20, both options will expire worthless
and your return on the spread would be 31% ($58.70 / $191.30).
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Options are not suitable for all investors as the special risks inherent to options trading my expose investors to potentially rapid and substantial losses. Please read Characteristics and Risks of Standardized Options before investing in options
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